Earlier today, the Office of Compliance Inspections and Examinations (OCIE) of the United States Securities and Exchange Commission (SEC) announced its 2016 examination priorities. These priorities are of particular interest to hedge fund and mutual fund managers, private equity firms and broker-dealers. Like last year, the priorities are organized around three themes.
This year’s priorities continue several initiatives to protect retail investors, including the examination of investment recommendations, conflicts of interest, supervision and compliance controls, and disclosure practices of investment advisers and broker-dealers servicing retirement accounts. OCIE will also continue to focus on branch office supervision, fee selection for investments advisers and dually registered investment adviser/broker-dealers, and public pension adviser activities with respect to pay-to-play. And OCIE now will also focus on “two popular investment products”—exchange traded funds (ETFs) and variable annuities—to, among other things, assess the suitability of sales and the adequacy of disclosures relating to them.
Cybersecurity compliance and controls at broker-dealers and investments advisers will continue to be one of OCIE’s primary focuses. Similarly, OCIE will continue to evaluate whether entities covered by Regulation Systems Compliance and Integrity (SCI) have established, maintained, and enforced written policies and procedures reasonably designed to maintain the operation of their SCI systems. OCIE now will also review the liquidity controls of advisers to mutual funds, ETFs, and private funds, and those of broker-dealers to these funds to assess, among other things, risk management, valuation, liquidity management, trading activity and regulatory capital.
Consistent with its risk-based approach, OCIE will continue to utilize data analytics to triage its examinations. Using these analytics, OCIE will collaborate with the SEC’s Division of Economic and Risk Analysis to identify (i) the employment and supervision of recidivist representatives, (ii) whether a broker-dealer is filing the number of suspicious activity reports that OCIE would expect if the broker-dealer is operating its business in compliance with anti-money laundering laws, (iii) activities suggesting involvement in pump-and-dump or market manipulation schemes, (iv) the existence of excessive trading, and (v) the promotion of new, complex, and high risk products.
Because these priorities highlight the SEC’s likely focus in upcoming regulatory examinations of investment advisers, investment companies and broker-dealers, they should be taken into consideration when evaluating compliance programs. If you expect to be examined by the SEC in this new year, give us a call and we would be glad to help prepare your firm and provide you our list of Top 10 things to do—and not do—during the examination.